Argentina’s President Vows to Protect the Poor From Her Policies

Argentine President Cristina Kirchner says she’s looking out for ordinary Argentines by ruling out a devaluation of the tightly managed peso, which already trades at a historic 55% discount in the country’s black currency market.

Devaluations are only good for a few rich people, and make the poor poorer, she explained Monday evening. As long as she’s president, Ms. Kirchner declared, no one should expect policy shifts that stray from “the heart” of her government’s “economic model” and lead to the de-industrialization of commodities-rich Argentina.

The thing is, her government’s economic model is based on aggressive monetary expansion to support swelling budget deficits, currency and capital controls, along with price caps of various forms.

The mix generates inflation that runs at more than double the official rate. It’s also pushing the black market peso perilously close to 10 per dollar, while the official peso exchange rate is crawling around ARS5.20 a dollar.

“What impoverishes the masses is high inflation (itself a regressive tax) and the concomitant significant real currency appreciation that conspires against growth, investment, and overall economic opportunity,” Goldman Sachs said in a Tuesday note. Instead of adjusting the statist policies that undermine the value of the peso, the government slaps a growing number of foreign exchange and external account controls to contain the distortions.

So Argentines, rich and poor, scramble to exchange pesos for any dollars they have amid expectations that real inflation of 25% or so a year will continue to erode their purchasing power, keeping up the pressure on the peso.

Given “a consistent slow bleed” of private sector U.S. dollar bank deposits, Siobhan Morden of Jefferies expects the government will impose yet more controls to stanch capital flight and try to cut the risk of a balance of payments crisis. But that will only add “more pressure on current stagflationary trends via import shortages, delayed investment and a higher blue chip FX rate,” she wrote in a note.

Ms. Kirchner’s comments came shortly after the International Monetary Fund’s Western Hemisphere director said the Fund thinks Argentina’s dual exchange rate system and protectionist policies will have a “negative effect” on Argentina’s economy, the third largest in Latin America.

The IMF, which has censured Argentina for its suspect official data that understate inflation and overstate economic growth, forecasts the country’s economy will grow 2.8% this year, even based on government-provided data. That’s the slowest projected growth for any economy in the region, except Venezuela’s.